Pethokoukis, Economics, U.S. Economy

Inflation as your frenemy

032913inflation

The New York Fed:

When the shocks are such that the nominal interest rate is constrained by the zero bound, anticipated inflation is far from neutral, with output increasing if inflation is anticipated to rise. Moreover, contrary to the common belief that inflation is less effective at stimulating output when inflation becomes more and more anticipated, the benefits of higher anticipated inflation can be extremely large at the zero bound.

The results presented here suggest that it may be beneficial to let the near-term inflation target move over time in a way that depends on the state of the economy. In particular, our analysis reveals that output and inflation can be stabilized more effectively by raising targeted inflation in the medium run, i.e., in a relatively short period after the shock which brought the economy to the zero bound has subsided. However, as in conventional analyses, once the economy has exited from the zero lower bound, there is no meaningful gain from raising the long-run inflation target.

Let me see if I have this correct: Expectations matter. And anticipation of higher inflation tomorrow could push consumer and business to spend more today. It also aids deleveraging since debt contracts are typically spelled out in nominal terms. The 2% inflation target should be not a ceiling. Letting it rise as part of returning nominal GDP closer to its pre-crisis trajectory would not loosen long-term inflation expectations as long as the endgame was clearly communicated. Again, inflation is everywhere and always a monetary phenomenon but it isn’t everywhere and always a problem.

 

 

2 thoughts on “Inflation as your frenemy

  1. Every where I look through history prices of raw materials and finished goods fall through the use of technology. It seems to me that our economy is naturally deflationary. If one’s income remained static, one could buy most goods more cheaply in the future. This is the net effect of the division of labor.
    So…why do we have inflation at all?

  2. Paul Volker proved that entrenched hyper inflation is as much about the public’s acceptance that inflation is here to stay permanently as it is actual economic pressures.He correctly as it turned out took a huge courageous gamble.By raising rates so high to get the public to accept the possibile fact that maybe inflation in the future will subside,it did.It had as much to do about the US consumers perception of the furure than the actual affects from raising rates through the roof.It is said that Volker asked president Carter why do you want to appoint me as fed chairman,Carter replied to brake the back of this god awful hyper inflation that has drained the morale of this great nation for too long now.Volker apparently got the point very well.Inflation dropped from a nasty stagflating 14 percent during the late seventies down to 4 percent by the early eighties.Paul Volker for my money deserves as much or more credit for a robust recovery from the double dip recession of the early eighties as does Reagen.Anyway a moderate CPI of 3-4 percent right now would help this economy tremendously by helping to suck up some of the record loose liquidity floating throughout our economy.Ive never understood the inflation hawks fear of some inflation.I was taught moderate inflation is a healthy outcome for the economy.Deflation is a much harder and dangerous beast for the economy to get our from under than an elevated rate of inflation.Just ask the nation of Japan,they are praying for just a two percent CPI,they have been in a twenty year plus deflation spiral of hell.

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